Just like with other investments, you may be subject to taxes on cryptocurrencies like Bitcoin, Ethereum, and others.
In 2014, the IRS issued a statement clarifying cryptocurrency isn’t considered an actual currency under tax law and is instead treated as property, so you are required to report gains, losses, and earnings on all transactions.
What Are Considered Taxable Events for Cryptocurrency?
You might be surprised that it’s not just when you sell your cryptocurrency that you could owe taxes. You could also be subject to taxes when you use your cryptocurrency to pay for goods and services, exchange it for another cryptocurrency, or receive it as mining/airdrop/staking rewards. For this article we’ll focus on what’s relevant for most people: capital gains tax.
Taxes are complicated to begin with, and crypto taxes can be even more complicated. Our calculator can help you estimate gains that may be subject to taxes but should not replace working with a tax professional, especially if your situation is complex.
How To Calculate Estimated Crypto Taxes
Capital gains tax applies when you sell an asset for more than you paid to buy it.
If you hold an asset for one year or less before selling at a profit, you realize short-term capital gains, which are taxed at your ordinary income bracket of between 10% and 37% for 2021 at the federal level.
If you hold an asset for more than one year before selling at a profit, you realize long-term capital gains, which are taxed at a rate of either 0%, 15%, or 20% depending on your taxable income for tax year 2021. Most taxpayers typically pay 15% on long-term capital gains. Be sure to consult your personal tax professional to confirm your situation. And don’t forget about state taxes.
Capital gains can be offset by capital losses, which are realized when you sell an asset for less than you paid to buy it. In fact, if your capital losses exceed your capital gains, you can actually claim a deduction of up to $3,000 per year against your ordinary income.
Read More: How to Avoid Capital Gains Tax
So how do you actually calculate your estimated capital gains taxes?
The good news is that you don’t have to run the numbers yourself. Using our cryptocurrency tax calculator, you can determine your estimated capital gains tax liability by entering a few pieces of information. Keep reading to learn more about how to use the cryptocurrency tax calculator.
Let’s say you bought $500 worth of Bitcoin on December 1st, 2020. On December 10th, 2021, you sold your Bitcoin for $1,450 (which is roughly what it would have been worth based on Bitcoin’s actual growth during that time). You experienced a capital gain of $950.
Because you held your cryptocurrency for more than one year, your gains are subject to long-term capital gains taxes. If you are a single filer with taxable income between $40,400 and $445,849 for 2021, then your federal long-term capital gains rate is 15%. When you multiply your capital gain by your long-term capital gains tax rate, you find that you have a federal capital gains tax liability of $142.50.
Remember that you can offset your capital gains with capital losses. Suppose you realized a $950 long-term capital gain on one cryptocurrency but then sold another for a long-term capital loss. You could use the long-term capital loss to offset the long-term capital gain and either reduce or eliminate your long-term capital gains tax liability.
This is a simplified calculator to help you calculate the gains of your cryptocurrency. You can use this calculator to get a quick estimate of the taxes you may owe in 2021 on your cryptocurrency gains.
Using this calculator, you can:
Derive your estimated gain (or loss)
Determine the estimated capital gains taxes
How to Use
To use this crypto tax calculator, input your taxable income for 2021 (before considering any crypto gains) and your 2021 tax filing status. Enter the price for which you purchased your crypto and the price at which you sold your crypto. Be sure to add how long you’ve owned the cryptocurrency.
Tip: If you’re looking for a way to track your crypto values across most existing coins and exchanges, be sure to check out our free financial tools, which allow you to track your crypto values alongside your other financial accounts.
How to Avoid or Save on Crypto Taxes
Capital gains are a good thing – they mean you made money. While it’s true that taxes are likely to take a percentage of your gains, you’ll still be better off financially than if you hadn’t experienced the gain at all. And luckily, there are a few ways to help you reduce or even eliminate your cryptocurrency taxes altogether:
Hold your cryptocurrency for more than one year. Most people will pay a lower tax rate on their cryptocurrency by holding for at least one year than they would by selling within one year.
Offset your gains with losses. While your capital gains will be subject to taxes, you can offset those gains with capital losses. You have a capital loss when you sell an asset below the price at which you bought it. The process of selling assets at a loss to offset gains is known as tax-loss harvesting.
What is the capital gains tax rate for cryptocurrency?
The tax rate you’ll pay on your cryptocurrency depends on how long you hold it and your taxable household income. If you hold your cryptocurrency for less than one year, you’ll pay short-term capital gains taxes at your normal income tax rate, which could be from 10% to 37%. If you hold your cryptocurrency for more than one year, you’ll pay long-term capital gains taxes at a rate of 0%, 15%, or 20%.
What are considered taxable events for cryptocurrency?
You might be surprised that it’s not just when you sell your cryptocurrency that you’ll pay taxes on your gains. You could also be subject to capital gains taxes when you use your cryptocurrency to pay for goods and services or when you exchange it for another cryptocurrency, including stablecoins. Because cryptocurrency is a type of property and not a currency in the eyes of the IRS, exchanging it for something else has a similar effect as selling it. Receiving cryptocurrency as mining/airdrop/staking rewards can also be a taxable event that’s typically treated as ordinary income.
Want a better way to manage your investments? Millions of people use Personal Capital’s free and secure online financial tools to see all of their accounts in one place, analyze their investments, and plan for long-term goals, like buying a house or saving for retirement.